Sea of Troubles Plants a Seed of Doubt

A handful of negative headlines hit a fragile market on Thursday and sparked round of fear but as traders began to wade through the headlines the fear diminished. The Canadian dollar shook off the worries and was the best performer in a sign of its underlying strength, while its Australian cousin lagged. A busy week in Asia-Pacific trading ends with Australian home loans as the lone economic data point. In today's Premium Insights, we added two new trades in EURJPY, while confirming our existing USDJPY trade with charts to highlight a technical similarity on EURUSD, USDJPY and EURJPY.

European banking worries have been lurking in the background ahead of the ECB stress tests but the worries flared up with a default at a major shareholder of Portugal's second largest bank Banco Espirito Santo. The Groupo Espirito Santo owns 25% of the bank and missed a short-term bond payment.

Banking problems can quickly snowball if depositors make a run on the bank and that's always possible after how accounts were treated in Cyprus. Portugal's central bank tried to ease worries but that's expected and they will try to shore up confidence in the day ahead.

Alone, the headlines might not have sent EUR/JPY to the lowest since February but very weak French and Italian industrial numbers added to the fear. In addition, Japanese machine orders collapsed 14.3% y/y, Chinese exports were soft and US retailers have been cautious early in earnings season.

Amidst all those headlines, the market hardly noticed initial jobless claims at 304K compared to 315K expected and the 4-week moving average falling to the lowest since 2007.

The ECB's Nowotny underscored that no decisions on QE will be made until year-end so the euro is essentially on its own. To us, the combination underscores once again the skew in this market. Traders are much more sensitive to bad news compared to good headlines. Those kinds of jitters are likely to linger.

Looking ahead, the focus shifts to second-tier data from Australia with housing finance for May due at 0130 GMT. Loans are expected to fall 0.5% but even a large fall in lending wouldn't rock AUD.

Yesterday's soft full-time jobs data along with weak Chinese exports weighed on the Australian dollar but it continues to chop around 0.94, which has been a magnet for the past month.